Microsoft withdraws Yahoo bid

Company scraps attempt to buy Internet icon

The tech nuptials of the year are off — and now each side has to find a way to bolster its online ad businesses without each other.

Microsoft abandoned its three-month courtship of Yahoo on Saturday afternoon over that old relationship bugaboo, money. Yahoo wanted $37 a share, but Microsoft was only willing to go up to $33.

The sweetened offer, valued at $47 billion, was $2 a share higher than the original bid, and Microsoft topper Steve Ballmer noted in a letter to Yahoo chief exec Jerry Yang that his company would have had to pony up at least $5 billion more to match Yahoo’s price, which it was not willing to do.

Ballmer also said the company would not attempt a hostile takeover.

Both sides put a positive spin on the withdrawal, which followed a Saturday morning negotiating session in Seattle. But both companies clearly have their work cut out if they are to make a dent in Google’s dominance over the growing online ad biz.

Last week, Ballmer mentioned several alternate companies that could help Microsoft rapidly scale up its online biz, including Facebook, AOL and MySpace. Yahoo has flirted with the latter two as alternate partners to Microsoft, and recently tested an outsourcing arrangement with Google.

“While Yahoo would have accelerated our strategy, I am confident that we can continue to move forward toward our goals,” Ballmer said.

And Yang suggested that Yahoo would be able to focus all its energies on its biz “with the distraction of Microsoft’s unsolicited proposal now behind us.”

Yahoo’s alliance with Google apparently factored heavily in Microsoft’s decision not to pursue a hostile takeover bid. In his letter to Yang, Ballmer outlined the reasons why that alliance was problematic. Chief among them: It would undermine Yahoo’s long-term viability; impair the company’s ability to retain engineers; raise regulatory issues; and allow Google to set prices for key search terms.

“I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares,” Ballmer said in the letter, which he made public to justify his case to shareholders for both companies. “But clearly a deal is not to be.”

Microsoft could still acquire Yahoo in the event that its stock takes such a beating that its board becomes more receptive to a deal. In that case, Microsoft could drive a lower price.